There was a great commentary piece in the Wall Street Journal (subscription required) yesterday titled, “Where are the Innovators in Health Care?” written by Regina Herzlinger, a professor at Harvard Business School, a senior fellow at the Manhattan Institute and the author of the book "Who Killed Health Care?"
Herzlinger describes the perverse disincentives to innovation in the health care industry, something that I wrote about last year for IEEE Spectrum and the various electronic health record initiatives being implemented by governments around the world. Basically, she argues, if a health care provider finds innovative ways to reduce the cost of treatment, the health care provider cannot share in the savings.
She gives an example of Duke University Medical Center, and its innovative program for people with congestive heart failure. Their innovative treatment,
“… so substantially improved patients' health that hospital visits and usage plummeted, the perverse nature of the payment system meant Duke couldn't benefit from saving its patients' money -- nearly $8,000 per person. In only one year, the program had reduced costs by 40%, yielding the kind of do-good returns that would normally earn kudos from Wall Street and Main Street. But, because the third parties pay providers only for treating sick people, they penalize innovators who make people healthy.”
Herzlinger goes on to write,
“Non-market based payment is but one of many barriers to innovation that plague the health-care industry. Insurance entrepreneurs who confront mandated benefits and "community pricing" can neither design nor price their innovations. Technology entrepreneurs must clear massive hurdles before securing the ‘coding’ and ‘coverage’ decisions that open the door to reimbursement. And health-service entrepreneurs must comply with tens of thousands of pages of regulations.”
The same thing happens in the defense industry as well, where innovations to reduce costs often are not embraced, because to do so would reduce a contractor’s net revenue. The government sometimes allows a portion of the cost savings to accrue back to the defense contractor if they are clever at reducing contract costs, but since these amounts are usually capped, the incentive for contractors to innovate are reduced.
Herzlinger calls for consumer-driven health care as a way to break what she calls, “the entrepreneur-suppressing status quo.” She believes that if consumers can purchase health care in a market, with transparency of pricing and information on effectiveness of treatments, we would end up with better health care at a lower cost.
I think Herzlinger is correct in theory, although in practice it assumes a medically-literate population. Unless both education and consumerism are brought together simultaneously, the gains that might be had could also be canceled out.
